Last Updated on Sep 1, 2021 by Manonmayi
In today’s day and age, there are multiple investment avenues available. However, two of the most popular asset classes remain to be shares and mutual funds. Shares are a direct investment in the ownership in the company. Mutual funds, on the other hand, are managed by professional fund managers and can be classified as a passive style of investing.
In this article, we break down the differences between shares and mutual funds to help you decide which is a more suitable option for you.
This article covers:
- How do mutual funds work?
- Who can invest in mutual funds?
- How to invest in mutual funds?
- How do shares work?
- Who can invest in share markets?
- How to invest in share markets?
- Mutual funds vs shares investment
Table of Contents
How do mutual funds work?
A mutual fund scheme invites money from various investors, pools it together, and invests that money in equity, bonds, and other money-market instruments. It can be a scheme investing in a particular asset or a combination of different assets. These assets are selected according to the investment objectives specified in the offer document.
- Mutual funds could be classified as equity funds, fixed-income funds, index funds, balanced funds, money market funds, income funds, exchange traded funds (ETFs), international funds, sectoral funds, and many others, based on investment objectives.
- If it is an equity mutual fund, it will invest in various equity stocks. It can be a large-cap fund, mid-cap fund, or even small-cap. However, if it is a debt fund, it will invest majorly in bonds. The investment objective can be further classified within the asset class itself.
- Returns from mutual funds depend on the effects of the market on the securities present in the portfolio. The market value of these securities, called NAV, keeps fluctuating daily.
Based on the inclination of the fund house, a fund can be managed by more than one fund manager. A fund is managed daily. Fund managers decide when to buy or sell investments to fulfill the investment objectives.
Who can invest in mutual funds?
Mutual fund investing is an online and straightforward process. You can either invest via a one-time lump sum, or even through a SIP (systematic investment plan), if your investment amount is low.
Mutual funds are great investment options for beginners or those investors who do not want the hassle of actively managing their investments. They can trust their money with professional fund managers.
How to invest in mutual funds?
Investors can invest the entire amount in one go in a mutual fund or through a SIP like a regular monthly investment.
You can invest in mutual funds both online or offline.
- For the offline method, you need to submit the application form with a cheque at the designated Investor Service Centres.
- For the online method, you can invest through the respective mutual fund’s official portal. You can also log in to your demat account and choose from several schemes and invest in the one best suited for you.
- You can also invest using financial intermediaries known as mutual fund distributors. They are registered with AMFI. It can be an individual or bank, or online distribution channel provider.
Let us now compare it with investing in equity markets directly.
How do shares work?
Share prices are influenced by the market forces of demand and supply. Let us understand in more detail:
- If a particular share is demanded hugely where its supply is inadequate, the share price will increase.
- If the demand for shares is at a lower point than its supply, the share price declines.
Stock exchanges determine the stock price based on algorithms of volume traded and how frequently its demand is fluctuating. You can earn returns on shares in various ways, including:
Dividends
As you become a part-owner of a company after purchasing its stocks, its earnings get distributed amongst its shareholders. Dividend income is not fixed, and the company’s directors decide distribution. Most of the time, it is a quarterly payment.
Short-term profit
You can choose positional trading or day trading to earn short-term profits. When prices of stocks escalate, you can sell them to book a profit. If the stock price declines, you can wait for further escalation or sell quickly to avoid a capital loss and a negative ROI.
Capital appreciation
Capital appreciation is the rise in the market price of the stock. It is calculated at the time of disposal of the stock as the difference between sale and purchase price of the stock.
Who can invest in share markets?
Since the stock markets are volatile, it is suitable for investors with a high risk appetite. Thoroughly research where you’re investing, and make sure the company has solid fundamentals. However, the share market is less risky for long-term investors who park their funds in fundamentally strong companies as returns on investment grow with the company’s growth.
How to invest in share markets?
Stock market investments are lucrative and have the potential to provide high returns over the years.
You can choose from the primary market via an IPO (Initial Public Offering) or even the secondary market via exchange-listed stocks.
An IPO is the process of offering a company’s stock to the public for the first time. The IPO window opens for a limited time. You need to bid for the shares to buy them at the issue price declared by the IPO company. You can invest in IPOs offline or online. For the online method, you need a demat account linked with your bank savings account.
In the secondary market, trading is facilitated by stock exchanges. The primary stock exchanges on which you can find all listed stocks are Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). To trade on an exchange, you need a stockbroker who acts as an intermediary between investors and the stock exchange. You also require a demat account and trading account with a SEBI registered stockbroker.
Mutual funds vs shares investment
Following are the key differences between mutual funds and shares investments.
| Basis | Mutual fund investment | Share investment |
| Form of investment | It is an indirect investment. | It is a direct investment. |
| Diversification | It is a well-diversified investment. | You need to invest in different stocks separately to diversify your portfolio. |
| Investing cost | It involves fund management charges, exit load, redemption charges, and so on. | It involves demat charges and brokerage charges. |
| Investment horizon | It is a long term investment. However, you can exit from a mutual fund before its maturity date. | You can invest for short term or long term as per your financial objectives. |
| Returns | It is known to make good returns in the long term. | You can make short term returns if you are skilled and experienced in the market. But one can also gain long term gains from the same. |
| Who can invest | Suited for beginner as well as advanced level investors. | It requires substantial knowledge of the stock market and is suitable for investors with a high risk profile. |
| Risk involved | Less risky when compared to individual stocks. | Extremely risky. |
Conclusion
The stock market can help in wealth creation irrespective of the investment avenue you choose, provided you understand your financial objectives and risk-appetite.
Investing in the stock market depends on your expertise, risk appetite, dedication to research, and knowledge about the market. You can also opt for mutual funds for slow but steady returns. Most investors diversify and have a portfolio comprising both equity and mutual funds.
